3. Developments in international trade and finance
3.5 Ethical issues in financial management
In pursuing profits and shareholder wealth maximisation, companies should act ethically, and in giving advice financial managers should be conscious of any ethical issues that might be involved in the matter. Business ethics covers aspects of business behaviour such as:
Honesty and integrity in business dealings with others: honesty is more than just remaining within the law!
Concern for other stakeholders, such as employees, suppliers and customers.
Respect for human rights: this might involve avoiding business dealings with unethical suppliers or suppliers who use child labour or slave labour.
Concern for the environment: the need to reduce or avoid pollution and the need to develop a sustainable business.
Recognition by large companies of the social responsibilities to the communities in which they exist and operate.
Some companies have expressed their concern for ethical conduct in a formal corporate code of ethics.
Corporate codes of ethics
A corporate code of ethics is a code of ethical behaviour, issued by the board of directors of a company. The decisions and actions of all employees in the company must be guided by the code. The effectiveness of a code of ethics depends on the leadership of the company – its directors and senior managers. These individuals must be seen to comply with the ethical code; otherwise other employees will see no purpose in complying with the code themselves.
It has been suggested that there are three reasons why companies might develop a code of ethics. These reasons are progressive, which means that companies might begin by having a code of ethics for the first reason, but then progress to the second and third reasons as they gain experience with implementing the code and appreciating its potential benefits.
Reason 1: Managing for compliance. The company wants to ensure that all its employees comply with relevant laws and regulations, and conduct themselves in a way that the public expects. For example, companies providing a service to the general public need to ensure that their employees are polite and well- behaved in their dealings with customers.
Reason 2: Managing stakeholder relations. A code of ethics can help to improve and develop the relations between the company and its shareholders, by improving the trust that shareholders have in the company. The code might therefore include the ethical stance of the company on disclosing information to shareholders and the investing public (openness and transparency) and on respecting the rights of shareholders.
Reason 3: Creating a value-based organisation. A company might recognise the long-term benefits of creating an ethical culture, and encouraging employees to act and think in a way that is consistent with the values in its code of ethics. (It could be argued that an ethical company, like a well-governed company, is a more likely to be successful in business in the long-term. However, there is no firm evidence to prove this point, and it is therefore a matter of opinion.)
Note on global organisations. Global companies might have difficulty in developing and implementing a code of ethics for the entire organisation world- wide, because of differences in ethical values in different cultures in different parts of the world. A criticism of codes of ethics of global companies is that they often focus on the company’s relationships with stakeholders in their ‘home country’ and do not give enough thought to their operations in other countries.
The content of a corporate code of ethics
There is no standard format or content for a code of ethics, but a typical code contains:
general statements about ethical conduct by employees
specific reference to the company’s dealings with each stakeholder group, such as employees, customers, shareholders and local communities.
A code of conduct should specify that compliance with local laws is essential. In addition, employees should comply with the policies and procedures of the company. There might be a statement that any employee who fails to comply with the company’s code of conduct will face disciplinary action.
The code might also include an overview of business conduct, and the need to protect the company’s reputation and ‘good name’. It might also contain statements about the values of the company, such as:
acting at all times with integrity
protecting the environment
the ‘pursuit of excellence’
respect for the individual.
A code of conduct might address its main concerns about its dealings with stakeholder groups and its ethical treatment of each group.
Employees. A code of ethics might include statements about:
- human rights, including the right of all employees to join legally-authorised organisations such as a trade union or political party
- equal opportunities for all employees, regardless of gender, race, ethnic origin, religion, age, disability or sexual orientation
- refusal to tolerate harassment of employees by colleagues or managers - concern for the health and safety of employees
- respect for the privacy of confidential information about each employee - company policy on giving or receiving entertainment or bribes.
Customers. A code of ethics might include statements about:
- fair dealing with customers
- product safety and/or product quality - the truthfulness of advertisements
- respect for the privacy of confidential information about each customer.
Competitors. A code of ethics might include statements about:
- fair dealing with competitors
- the use of techniques for obtaining information about competitors (industrial spying)
Shareholders. A code of ethics might not include much about shareholders, because the relationship between a company and its shareholders might be contained in a code of corporate governance that the company follows. The key issue with shareholders is to maintain and develop trust and confidence, which might be achieved through disclosure of information (openness and transparency).
Dividend and retentions policy
Retentions
Dividend policy
Monitoring dividend policy
4 Dividend and retentions policy